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A 5/1 ARM or "adjustable-rate mortgage" has an initial interest rate that remains in effect for five years, after which time the rate is adjusted once annually. The "5" of "5/1" refers to the number of years the initial rate will remain fixed and the "1" refers to the time interval between subsequent rate adjustments.

Oggi Kashi
Broker Associate, Paragon Real Estate Group
All data from sources deemed reliable but subject to error and omission, and not warranted. CA DRE 01844627

Here is a very detailed explanation that was published by the Canadian firm INVIS:

When Choosing The Right Option Can Save You Thousands.

This is one of the most confusing times in recent history for those looking to acquire, renew or refinance a mortgage. In addition to making sense of seesawing interest rates, there are an incredible number of options to choose from.

As a starting point, you have to decide if you want the stability of a fixed rate mortgage, or if you're comfortable with the potential risks and rewards of a variable rate mortgage.

Over the past few years, interest rates have fallen to historically low levels and as a result, many are choosing the peace-of-mind of a fixed rate mortgage over the potential savings of a variable rate mortgage. However, confidence in the economy is putting pressure on longer-term interest rates, such as those for multi-year fixed rate mortgages. As a result, many are turning to variable rate mortgages as a more attractive short-term option.

â€œA variable rate mortgage is now around a full point (one per cent) cheaper than a fixed rate mortgage,â€ says Feisal Panjwani, senior mortgage consultant for Invis. â€œBecause of the widening spread between short and long-term rates, even if interest rates rise, homeowners with a variable rate mortgage have an advantage.â€

A variable rate mortgage allows the borrower to take advantage of low rates -- the interest rate is calculated on an ongoing basis at prime minus a set percentage. (Prime is the base rate that banks use in pricing loans to their best and most creditworthy customers.) For example, if the prime-lending rate of a bank is 4.50 per cent, the holder of a prime minus 0.50 per cent mortgage would pay a 4.00 per cent interest rate, until the prime rate changes.

Why choose a variable rate mortgage now? Consider the following:

A homeowner has $125,000 remaining on their $250,000 property loan and a 25-year amortization period. Their monthly payment is $716. Let's assume prime increases over the next five years to 5.75 percent -- this equates to a 0.25 percent increase per year (on average).

The homeowner takes a common variable rate mortgage at prime minus 0.60 percent. By taking the variable mortgage instead of the comparable five-year fixed, the homeowner saves $3,129.

The homeowner's outstanding balance at the end of five years: $110,371 with a fixed-rate mortgage at 4.85 percent versus $107,243 with a variable-rate mortgage. Prime would have to increase to over 6.75 percent in the next five years before variable rate mortgages become an unattractive option for homeowners.

â€œMany simply prefer the greater sense of stability that a seven to 10-year fixed rate mortgage can provide in a changing rate market,â€ says Jim Rawson, regional sales manager, Invis. â€œNevertheless, the advantages of a variable rate borrowing strategy are real: over the last 50 years, research shows consumers would have been better off by borrowing at prime rather than at a five-year fixed rate 88 per cent of the time.â€

The only other thing you need to know about an ARM is the cap. As the others said, it stays the same for 5 years and then will adjust every year. You need to find out how much it can adjust each year (often 1%) and the cap which is the max amount it can go up over the life of the loan. Caps can be 5 points which means in 10 years the rate could be 9.625% or more depending on the cap. With rates so low as they are these days I never suggest anyone should get an ARM, because you know they will soon be going up, unless you are positive you will be selling the house in 4-5 years.

You've been on here for six months asking questions. Glad you like the forum, but sad you still haven't found anyone you trust to work with one on one. The other answer addressed what 5/1 means. The question you did not ask is how much escrow will be added to this for estimated property taxes and insurance. Lenders do not let their customers pay this on their own. They will add several hundred to your payment to build up a fund to pay these bills for you when they are due.

The rate of interest will remain the same for five years, then is subject to an adjustment at the end of the five years...there should be a maximum amount the interest rate may increase. I would ask why you are even considering an adjustable rate loan, with interest rates as low as they currently are ---- near the lowest in history. What this means is that in all probability your interest rate will increase at the end of the 5 yr fixed period. Look seriously at the possibility of obtaining a fixed rate mortgage, then you know with certainty what the P&I payment will be for the life of the loan.

5/1 arm means the following: For the first 5 years of this loan the rate is fixed. After the fifth year the loan will adjust every year,hence the 1 after the 5. Your annual adjustment after the 5th year is based on a margin and whatever index is being used. It is usually the LIBOR index which stands for London Interstate Bank Offered Rate. The margin is fixed and is added to whatever the LIBOR rate is at the time of the adjustment. There is also usually a cap for the maximum the rate can go up or down over the life of the loan. Arms can be beneficial but if you plane on keeping the property for a long time a fixed rate is definetly a better option since a fixed rate is just as low. If you are looking for financing in Florida I have a great person her locally in the Tampa Bay area who handles the entire state of Florida if you are interested. I can be reached at 727-365-9206. Thank you and have a nice weekend.